Auto insurance is a contract that protects your financial
security in case of an accident. Although it is not
mandated by federal law, the purchase of auto insurance is
usually a requirement in most states; every state (with the
exception of New Hampshire and Wisconsin) have minimum
insurance laws.
These two states, instead of having insurance requirements,
have mandated financial responsibility laws, so that the
owner of a car is required to show that he has sufficient
funds to pay any necessary claims. If said owner cannot
produce proof of satisfactory assets, then he must buy an
auto insurance policy. Regardless of the law, having good
auto insurance is practical for the driver who wishes to
avoid lawsuits or immense repair bills.
According to the Insurance Information Institute (III), a
basic auto insurance policy is comprised of six basic types
of coverage. While some of these types of coverage are
required by state law, some are considered optional.
These are: 1. Bodily injury liability 2. Property damage
liability 3. Medical payments or Personal Injury Protection
(PIP) 4. Collision 5. Comprehensive 6.
Uninsured/Underinsured motorists coverage
Liability Insurance
Liability coverage is the foundation of any car insurance
policy, and is required in most states. If you are at fault
in an accident, your liability insurance will pay for the
bodily injury and property damage expenses caused to others
in the accident, including your legal bills. Bodily-injury
coverage pays for medical bills and lost wages.
Property-damage coverage pays for the repair or replacement
of things you wrecked other than your own car. The other
party may also decide to sue you to collect "pain and
suffering" damages.
Liability insurance (both bodily injury and property
damage) is the foundation of most auto insurance policies
and is ideal if you are seeking a low cost car insurance
policy. Every state that requires auto insurance mandates
the purchase of property damage liability, and Florida is
the only state that requires auto insurance but does not
call for bodily injury liability. If you are at fault in an
auto accident, your liability coverage will pay all the
expenses, bodily injury, property damage, and any legal
bills. The bodily injury coverage would pay for medical
bills and lost wages; the property damage coverage would
pay for any auto repairs, or replacement. Property damage
liability usually repairs damage to other vehicles, but can
also cover damages to things such as lamp poles, fences,
buildings, or anything else that your car may have struck.
Remember, although purchasing only the minimum can get you
a cheap auto insurance rate, if you cause a serious
accident, minimum insurance may not cover you adequately.
That's why it's a good idea to buy more than what your
state requires. If you own a home and have nest egg and a
savings account, you should consider more liability
insurance because, in most states, drivers are allowed to
sue other drivers who injure them in car accidents. If
you're sued and your liability insurance doesn't pay for
all of the damages, your personal finances are on the hook,
and it's likely you'll become a target.
Collision and Comprehensive Coverages
If you cause an accident, collision coverage will pay to
repair your vehicle. You usually can't collect any more
than the actual cash value of your car, which is not the
same as the car's replacement cost. Collision coverage is
normally the most expensive component of your car insurance
rate. By choosing a higher deductible, say $500 or $1,000,
you can keep your premium costs down. However, keep in mind
that you must pay the amount of your deductible before the
insurance company kicks in any money after an accident.
Insurance companies often will "total" your car if the
repair costs exceed a certain percentage of the car's
worth. The critical damage point varies from company to
company, from 55 percent to 90 percent.
Comprehensive coverage will pay for damages to your car
that weren't caused by an auto accident: Damages from
theft, fire, vandalism, natural disasters, or hitting a
deer all qualify. Comprehensive coverage also comes with a
deductible and your insurer will only pay as much as the
car was worth when it got wrecked.
Because insurance companies normally will not pay you more
than your car's book value, it's helpful if you have a
rough idea of this amount. Check the Kelley Blue Book or
the National Automobile Dealers Association. If your car is
worth less than what you're paying for the coverage, you're
better off not having it.
Neither collision nor comprehension insurance is required
by any of the states, but some lenders, when the owner
finances the car, may require the purchase of collision and
comprehensive in the loan agreement. Even when it is not
required, collision and comprehensive coverage is highly
recommended by the insurance industry, so that in the
unforeseen event of damage or theft, the owner of the car
can avoid heavy bills. Theft of cars is not as unusual as
some people may think. In 2004, a car was stolen in the
United States every 26 seconds, and a car had a 1 in 190
chance of being stolen.
Medical Payments, PIP, and No-fault coverages
Medical payments (MedPay) coverage will pay for your and
your passengers' medical expenses after an accident. These
expenses can arise from accidents while you're driving your
car, someone else's car (with their permission), and
injuries you or your family members incur when you're
pedestrians. The coverage will pay regardless of who is at
fault, but if someone else is liable, your insurer may seek
to recoup the expenses from him or her.
Personal Injury Protection (PIP) coverage is an extended
form of MedPay. PIP may cover expenses that are related to
injury, but not necessarily medical, such as lost wages,
childcare and funeral costs. PIP coverage is currently
required by sixteen states. If you are already insured
under a good health insurance policy, then fortunately,
there is no need to buy more than the minimum required
amount of PIP or MedPay insurance.
If you have a good health insurance plan, there might be
little need to buy more than the minimum required PIP or
MedPay coverages, if at all. And, if you already have
disability insurance, there's little reason to purchase
higher-than-minimum amounts of PIP.
Uninsured/Underinsured Motorists Coverages
Uninsured motorists (UM) coverage pays for your injuries if
you're struck by a hit-and-run driver or someone who
doesn't have auto insurance. It is required in many states.
Underinsured motorists (UIM) coverage will pay out if the
driver who hit you causes more damage than his or her
liability coverage can cover. In some states, UM or UIM
coverage will also pay for property damages. Similarly,
underinsured motorists insurance will cover any damage
caused when you are struck by a driver who is not insured
for a sufficient amount.
If you are hit, as a pedestrian, underinsured coverage will
cover the expenses. Uninsured motorists insurance is
currently required by twenty states, and Underinsured
motorists coverage is required by only four: Connecticut,
Minnesota, Maine, and Vermont.
You'll probably want to have at least the minimal amount of
UM/UIM because if you can't find the other driver, you'll
at least have some coverage for pain-and-suffering damages.
Add-on Features
Several supplemental auto coverages are available, either
as separate premium items or included in augmented
policies. -Rental reimbursement, a common add-on, covers
vehicle rentals required because your car is damaged or
stolen. -Coverage for towing and labor charges in case of a
road breakdown is also common. -Gap coverage for your new
car will pay the difference between the actual cash value
you receive for the car and the amount left on your car
loan if your vehicle is totaled in an accident.
Basic auto insurance is required by virtually every state
and is typically the cheapest auto insurance in the
marketplace. Proof of insurance is required at different
times throughout the life of a vehicle.
You may be asked for proof of insurance at any and all of
these times: at vehicle registration, at the time of an
accident, and any time when driving the vehicle. It is
suggested that the owner of the car keeps proof of
insurance in the car at all times, instead of on his or her
person, so that it can be available at all times, no matter
who is driving.
Any violations of state law regarding auto insurance could
result in, at best, a hefty fine, and at worst, suspension
of your driver's license and/or time in jail. The dire
consequences of driving while uninsured are not worth the
neglect of paying for insurance. The chance that an
uninsured driver will avoid detection is slim; he is likely
to be caught and strictly punished.
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Amy Danise is a staff writer for http://insure.com . Visit
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